Wealth management will provide the biggest boost to earnings at global banks over the next two years, according to one of the world’s foremost banks analysts – which could be good news for Morgan Stanley, UBS and Credit Suisse.

UBS houses a huge wealth management arm

In a research note published this week, Kian Abouhossain, senior banks analyst at JP Morgan, wrote that wealth management was the “theme for 2013” and “the most attractive and undervalued business relative to other lines, such as retail/corporate banking, investment banking and custody”.

Large banks, he said, were better placed to absorb the impact of tough new regulations and growing tax demands that have impacted rival wealth managers operating offshore. The 20 largest banks with private banking arms account for 49% of the wealth management industry, according to JP Morgan’s analysts.

However, Abouhossain said “structural changes could lead to ongoing consolidation in the fragmented wealth management industry”, offering opportunities for these larger institutions to pick up the slack.

He added: “There are no structural issues in private banking such as we see in investment or retail banking. Private banking requires less regulatory capital and the current Basel III capital regulations are making it even more attractive.”

Wealth management divisions are capable of boosting their return-on-equity for nine global banks analysed by Abouhossain to 35% by 2015, against an average of 13% in investment banking. Retail banking is on target for 30%.

Evidence of this potential came last week when Morgan Stanley published its fourth-quarter results. The US bank, under chief executive James Gorman, has embarked on a strategy to diversify its earnings away from investment banking and towards wealth and asset management.

Pre-tax profits at Morgan Stanley's wealth management division rose by 27% last year to $1.6bn. The wealth division's pre-tax profit margins jumped to a record 17% in the fourth quarter, against 12% a year ago, as the bank’s takeover of Citigroup’s brokerage operation started to bear fruit.

Related

Other banks with large wealth offerings include the Swiss giants UBS and Credit Suisse. Christopher Wheeler, a senior analyst at Mediobanca Securities, said that UBS’s wealth arm “should see a return on equity of 60% by 2014” adding that the equivalent figure for Credit Suisse would be 35%. “Wealth is their last best business,” he said.

Benefits are available from the cross-referral of services between investment banks and wealth advisers but Abouthossain warned this relationship can be overstressed: “We have advocated a more aggressive scale back of the IB divisions of Tier 2 FICC players like UBS, CS [Credit Suisse] and MS [Morgan Stanley] as we believe the arguments in favour of running a full-scale IB to support the wealth management client base are overstated.”

But investment bankers are determined to prove their case. In an internal UBS memo sent out on Tuesday co-signed by Andrea Orcel, chief executive of its investment bank, and UBS heads of wealth, the group has pledged to offer a 24-hour service to its global family office clients: “They will benefit from a globally coordinated approach with superior research, investment advice and solutions.”

JP Morgan pointed out that wealth assets tend to be “sticky” compared to the clients of other divisions. A key factor is in the close relationships that generally exists between wealth clients and their individual advisers.

--write to mike.foster@dowjones.com

• Correction: an earlier version of this story incorrectly named the Mediobanca Securities analyst as Christopher Walker. This has been corrected.